Our ingenuity will revive growth in global productivity – eventually

By Eric Lascelles

Why productivity’s prospects remain the subject of fierce debate.

Productivity growth has faltered over the past decade, undermining the global economy at precisely the moment that demographic supports have also soured. These twin indignities largely account for the economic malaise that has swept over both developed and emerging countries.

The burning question is whether these challenges are permanent or temporary. Alas, the demographic outlook is indisputably poor for the next several decades. But productivity’s prospects remain the subject of fierce debate.

The pessimists dwell on a series of fading one-time dividends that artificially accelerated productivity growth over the past century, including rapid urbanization, the rise of universal education, the widespread entry of women into work forces and substantially extended lifespans. These trends have now matured, making for a less forceful contribution in the future.

There may also be diminishing scope for emerging economies to continue hoovering up the developed world’s technologies, if only because there are far fewer technologies remaining to absorb.

Finally, it’s popular to argue that the past two centuries were blessed by the discovery of a series of profound new technologies, each of which supercharged productivity growth for a time. Examples include the railroad, electricity, the telephone, mass production, the combustion engine, the corporation, the radio, the air conditioner, plastics and antibiotics. The presumption is that future decades will not match this frenetic pace.

Were these the only relevant considerations, productivity’s outlook would be undeniably grim. But they are not. A deeper look reveals several manifestly positive forces, as well.

A natural starting point is to properly understand why productivity growth has slowed so forcefully. For developed countries, the root causes appear to be temporary. The initial deceleration reflected the end of an IT-related productivity spurt that spanned the mid-1990s to the mid-2000s. Such booms never last long, and the fading effects merely downgraded productivity growth to a normal level.

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The global financial crisis then imposed a second downward pressure, reducing productivity growth from normal to outright slow. The crisis and its aftermath hurt risk appetite, undermined capital investment and interfered with on-the-job skill acquisition due to high unemployment. It will take many years for the resultant hole in the capital stock and the labour force’s skill gap to close, but these are not truly permanent impediments.

The counterpoint to emerging economies’ shrinking capacity for technology absorption is that their new-found proximity to the world’s technological frontier puts them in a much better position to begin innovating themselves. The potential pool of inventors has effectively gone from fewer than a billion people to several billion in one fell swoop.

While the much-ballyhooed self-driving car is far less revolutionary than the invention of the car itself, there are still plenty of profound general-purpose technologies making their mark today. The computer revolution is not yet complete, network technologies are at best halfway deployed and the robotics revolution is still in its early stages. Each has a broad effect on a wide range of sectors, and should spur the development of future technologies. A raft of lesser technologies is also on the cusp of deployment in sectors such as health care, energy and military.

Though tempting, it is folly to attempt an accounting approach that quantifies the expected technologies of the future versus the greatest hits of the past. Many future inventions will come as utter surprises, as they always have.

What matters is that the basic ingenuity of humankind has not suddenly been extinguished. Basic science continues to advance at a robust rate, and the potent mixes of rules and incentives that have nurtured generations of inventors since the Industrial Revolution remain in place.

Empirical evidence supports an optimistic assessment. Research and development usually leads to productivity growth, and it has lately risen to a record-high share of GDP in the United States and among middle-income developing countries. Real U.S. capital investment is now a larger part of GDP than normal, and businesses have lots of incentives to extend this trend thanks to an unusually high return on capital.

At the business level, the Internet is revolutionizing the delivery of goods and services, and enables radically greater scalability for companies with clever ideas. These forces are indisputably a positive for technologicalchange, if a challenge to legacy companies and investors. For workers, accelerating automation – an offshoot of the computer and robotics revolutions – presents an existential threat.

Where does this leave us? Productivity growth should remain subdued over the next few years as the legacy of the global financial crisis plays out. However, this should not be interpreted as an endorsement of the status quo; businesses and workers are at serious risk of disruption even during this lacklustre era. Moreover, over the long run, the prospect of faster innovation – thanks to the continued unfurling of existing technologies, the inevitable arrival of new technologies, greater help from emerging countries and increased rewards for good ideas – should allow overall productivity growth to neutralize its fading tailwinds and revive to a normal clip.

The article is for information only and contents do not constitute recommendation to purchase any investment product. Nothing in this article constitutes legal, accounting or tax advice and you are advised to seek independent legal, tax and accounting advice prior to acting upon anything contained in this article.

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